August 14, 2013

Business of Editing: What to Charge (IV)

Originally, part IV was scheduled to be the last part of this series, and was to tackle the question, “Why bother?” However, what was part IV is now part V. The change was made because I have received several requests for clarification on how to determine what to charge. The confusion seems to stem from two things:

The effective hourly rate (EHR) discussed in parts I, II, and III, is based on a 40-hour work week. The calculated EHR is what is needed to be earned each hour of that 40-hour work week. This does not mean that you must have 40 billable hours, just that this is the EHR that each hour has to earn even if the earning has to be compressed into 20 billable hours.

I did not take the calculation to the final step, which is determining the actual hourly rate. I assumed that readers would be able to make that final step themselves. I have been using the EHR for so many years that what to do seems obvious to me, but in reality, it is not so obvious — as readers have pointed out — and so that is the topic of this post: How do you calculate the actual hourly charge?

For purposes of this example, let’s change the dynamic a bit. Although we’ll retain the $30 per hour charge, the 20 billable hours per week, and the 40-hour work week for purposes of calculating our current net EHR, let’s make our expense number a more realistic $4.60 per hour (based on these monthly expenses allocated to the business: rent/mortgage = $500; heat, water, and electric = $200; telephone = $40; and maintenance = $50). This changes our net EHR to $10.40 ($15 gross EHR − $4.60 expenses) based on a 40-hour work week.

(If your work week is only 30 hours, the method of calculation is the same but the numbers change. For a 30-hour work week, your gross EHR would be $20 and the same expenses would equal $6.13 per hour, giving a net EHR of $13.87. The figures change because the number of hours over which the EHR has to be earned has changed. You need to calculate the EHR using your work week, expenses, and hourly charge.)

Although some readers think we only need to pay attention to billable hours, that is not true. It is true that in a 40-hour work week we do not bill for 40 hours; we do have administrative matters and marketing, for example, that need to be addressed for which we cannot directly bill a client. But these are no different from the rent. They need to be paid for and every business calculates what it needs to charge customers by including time spent on nonbillable matters. The same is true for sick days and vacation time. These items are part of the expense of doing business; we just cannot give them precise numbers like we can give rent.

Consequently, the hourly charge that we determine accounts for the facts that we have only so many billable hours in a week and we also have hours in the week that we have to devote to nonbillable matters.

If we were to use the net EHR we calculated ($10.40), your average weekly earnings, after expenses, would be $416 or a yearly income after expenses of $21,632. But our goal is for that yearly income to be $50,000.

Here are the steps we need to take to obtain the EHR data and calculate how much we need to charge to reach our goal of $50,000 after expenses:

Add the expenses to the EHR because the EHR currently only represents our net income (after expenses) goal
$24.04 EHR + $4.60 expenses per hour = $28.64 EHR
(or an average gross weekly income of $1,145.60 which translates to gross yearly earnings of $59,571.20)

Calculate the number of billable hours in a year:
20 billable hours per week × 52 weeks = 1,040 per year

To determine the hourly rate you have to charge, divide the gross annual income by the number of billable hours:
$59,571.20 ÷ 1,040 billable hours = $57.28 per hour

Now you know what you have to bill per hour to have a net annual income of $50,000 while having only 20 billable hours a week.

Your question is: This number can be calculated without calculating the EHR, so why go through the trouble of calculating the EHR? Why not go to the heart of the matter directly?

The answer is that few of us can directly charge the hourly rate we need to earn. How many of your clients would knowingly pay you $60 an hour for copyediting? Most of us have difficulty transparently charging and collecting that amount, especially if we work for publishers. That is why we began this series with the hourly charge of $30.

We need to calculate the net EHR to see what we are really earning under our current charging scheme. Most of us see that this week we brought in $600 and the week before we brought in $900 and last year we had a gross income of $41,628. And we also see that when it came time to pay the rent, we paid it, even if we struggled to do so — the same being true of our other bills. But few of us really know what we are really earning, and in the absence of knowing that, we have no foundation on which to evaluate the manner in which we run our business.

The hourly charge figure tells us that if we want to continue our current way of doing business, we need to double our hourly charge (from $30 to $60). In other words, our current business methods are not sustainable at the level of our economic goal.

The $28.64 EHR, which is based on your economic goal, tells you what hourly rate you need to average over the 40-hour work week in order to meet your economic goal. This number is important because it is often a more achievable number. It is also an argument for abandoning the hourly rate method for the per-page or project-fee method of billing, because, unlike the hourly method, these methods reward you for productivity and efficiency.

The result is that with these three numbers in hand, you are in a position to evaluate your current business and can align your goals with your decision regarding what and how to charge. For example, if you know you need to charge $60 an hour for 20 billable hours to meet your goal, you can either find clients willing to pay that rate, increase the number of billable hours in your work week, or lower your economic goal. If you increase your billable hours from 20 to 30, the hourly charge drops by approximately one-third, from $57.28 to $38.19 (or from $60 to $40). (Note: The EHR does not change. The EHR changes only if the work week total hours change and/or the economic goal changes.)

In my experience, it has been impossible to charge the hourly rate I would need to meet my economic goals. On the other hand, by analyzing my work habits, increasing my productivity and efficiency, and using a per-page/project-fee method of charging, I have been able to meet, and almost always exceed, my required EHR. There are weeks when I do not meet the EHR over the course of the work week hours, but those weeks are made up for by the weeks that I exceed my EHR.

The EHR also serves as the standard against which I judge my business. I evaluate clients and projects based on the EHR. Clients whose projects regularly do not meet or exceed my EHR become ex-clients, because I know they cannot be made profitable.

I am not in business to lose money or not meet my goals, which is why I rely on the EHR and review it constantly. Are you in business to lose money? Under your current setup, how do you know whether you are making or losing money, and if you are making money, how much you are really making?

There are better formats to quoting prices other than by an hourly figure. Hourly figures become a commodity as it opens the door for clients to ask for a better price.

To come up with any format the hourly figure comes into play but it would not be shown to the client. They do not have to know, nor should they know, what you want or need in hourly terms. They want to know what it will cost them for a given project which often is an unknown until one gets into it.

In prevouls posts I’ve suggested other ways to pesent one’s fees, so I’ll not repeat them here.

This seems a convoluted way to get to a simple answer – as evidenced by the first comment. It’s not helped by jumping between hourly, weekly, monthly and annual figures. Then you multiply by 1024 in step 3 and divide by 1024 in step 4 – no wonder editors like Ruth are scared off.

The 40-hour theoretical week is an unnecessary complication. Far simpler is to take the goal of $50,000 per year, call that $1000 per week (giving yourself two weeks for vacation, illness, whatever). Then if you can only bill 20 hours/week your charging goal is simply 1000/20 = $50 per hour.

If you want to recover overheads on top of that then add your annual expense estimate to the original goal. Using your figures of $790 per month that’s $9480/year, or $10,000 to be safe. Now your goal is $60,000/50 = $1200/week or $60 per chargeable hour. That’s a tad higher than your figure of $57.28 with a conservative fudge factor of less than 5%. I doubt that any the other figures in this exercise have an accuracy better than 5%.

Finally as you and others have pointed out, ultimately the hourly charged rate is largely irrelevant. Publisher want work done within their budgets; editors wants to earn enough for their needs. The decision for the editor is simply can you charge $1200 for work that can be comfortably completed in a week? If you can then it’s irrelevant whether you call it 60 hours at $20 or 20 hours at $60 or any number in between. If you can’t then you either decline the job or accept a lower income.

By the way, my first first ever publishing job was editing junior high school mathematics books. I got the job because none of their other editors could deal with numbers. So I understand why editors like Ruth find this confusing.

My way of doing things is closer to Jim’s, although I start with the goal figure from my annual budget.

I track my business and life expenses and have for years, so my rates are based on what I actually need to make, want to make, and can make, not fantasy figures.

I shocked that someone on this thread said she doesn’t take what she needs to earn into account when setting her rates. Setting rates independent from the reality of what it costs you to live (or not knowing what it costs you to live) and hoping it will all work out in the end seems like a bad idea to me.

Like Jim, I use my hourly rate is a reference point. I bid most jobs with a flat rate anyway.

Alas, the series was not intended to have 5 parts, but because of subscriber queries, it became a necessity.

As to your approach, if you think it serves you well, then follow it. If you primarily bid flat rates, however, I would think that knowing your EHR rather than your hourly rate would provide for more knowledgeable bidding. That has been my experience. (Of course, one must also know how many pages an hour one can edit for a project or per-page rate to work, in addition to the EHR/hourly rate.)

Like you, I primarily set project rates; essentially, that is the same as using a per-page rate. I have found that my hourly rate is meaningless in determining whether a project has been profitable or not (and thus adds to data about future pricing), but then I am rarely in a position to say, “OK, I need to make $60 an hour and I anticipate that this project will take me 100 hours, so I bid $6,000” only to have the client say, “The project is yours.” My clients have already come to the conclusion that the project should take 100 hours and they are willing to pay $25 per hour (or its equivalent). Consequently, when I bid, the EHR forms a more realistic basis for my bidding.

The EHR also forms a better basis, in my experience, to determine long-term profitability. It is not enough, or so much of the business world thinks, to know that income meets expenses (expenses includes not only business expenses but all of the money you “take” as your “salary,” which for most of us is whatever is left over). In that event, you may be treading water rather than being truly profitable. This is why companies like Apple have so much cash — they are looking beyond the very basic income meets expenses sense of profitability.

I’ve been a successful independent freelancer for twenty years. I am not merely treading water. I am thriving.

My budget includes more than “basic income to meet expenses.” I budget for the reality of my life which includes basic expenses, contingencies, savings, and desired profit. (Isn’t that what a budget should include?) I have tracked my budget versus expenses and my business hours (billable and non) for years, so I am intimately familiar with the economic realities of my business.

Honestly I can’t see how your complicated EHR figure would serve me any better as a reference point than my easily-calculated hourly figure does. Whatever reference point you use, you either accept or decline a job based on that. And if you bid lower than the rate you know you need to thrive, then you have to make up the difference somewhere else. It’s as simple as that.